News

Unconstrained and high conviction approach the key to outperformance

5 December 2017

With the increasing popularity of index funds, it’s important for fund managers to differentiate themselves or they’re not adding any value for investors, says Julian Beaumont, investment director at BAEP.

BAEP manages money in a flexible way, is relatively unconstrained in what or how much can be invested in a particular opportunity, and with the ability to concentrate in only high conviction ideas.

It’s a strategy that has paid dividends, with the Bennelong Concentrated Australian Equities Fund rated the number one Australian equities fund over one, three and five years according to the latest Morningstar Australian Sector Survey (as at 31 October 2017). Over five years the fund has returned 20.6% after fees, compared to the benchmark’s return of 10.2% (as at 31 October 2017).

“Many of the well-owned large caps seem unexciting to us at present – for example, we don’t hold Commonwealth Bank, BHP, Telstra, Woolworths or Wesfarmers,” Julian says.

“We genuinely look right across the market to find conviction. Right now our two top holdings are CSL, the $60 billion biopharmaceutical behemoth, and BWX Limited, a company that we first invested in on a pre-IPO basis and was valued at about $100 million at the time.

“We aren’t compelled to invest in stocks or sectors just because they’re big, popular or well-covered. In fact, the best opportunities often arise where the opposite is true.

“Currently, the fund has 20 stocks in the portfolio. As a fund manager, we ask ourselves: is there any value in adding our 21st best idea into the fund? Sometimes there is, particularly to manage the risk of the portfolio, but right now there isn’t.

“It’s basically unconstrained stock picking, with a very tight control around stock and portfolios risks.

“We tend to hold up relatively well in down-markets. It’s during strong bull markets, particularly those led by cyclicals, lower quality and speculative stocks, where we can fall behind the pack. Being entirely focused on the fundamentals doesn’t work as well when the market has a head of steam, but it works well over the long haul.

“Right now the fund is heavily invested in companies selling quite defensive products or services, such as medical products, skincare creams, fruit produce, plumbing fittings, pizza and wine. It’s also heavily invested in exporters or global companies that have an exportable competitive advantage that they are profitably leveraging for growth in global markets.”